INSURANCE-RELATED COURT CASES
Digested from case reports published online
COURT DECISIONS

Bad day for Backis

Diane Backis was a Cargill employee for several decades at a grain facility that Cargill operated in Albany, New York. The facility stored grain that Cargill, as part of its grain sales business, purchased in the Midwest and transported to Albany by railcar. Backis worked at the Albany facility as a “merchant/admin leader.” Her responsibilities included negotiating sales contracts with local Albany grain customers, entering sales into the accounting system, communicating with Cargill on what grain was needed to fulfill the sales commitments, and handling all accounts and invoices for these transactions. Given Backis’s experience, she understood Cargill’s financial systems and had control over the Albany facility’s financial records.

Around 2008, Backis began a fraudulent scheme, at least in part to embezzle money from Cargill. She misrepresented to Cargill the price at which she could sell grain in the Albany market; directly communicated these inflated prices to Cargill and entered false sales contracts into Cargill’s accounting system; and manipulated the receivable balances, customer payments, and inventory records to reflect these sales. Believing that the grain would be sold at the inflated price, Cargill shipped additional grain to Albany. Backis then sold the grain at prices below those reflected in Cargill’s accounting system. Although Cargill had checks in place, including audit procedures and internal controls, Backis knew how to circumvent them. Cargill did not discover Backis’s scheme until February 2016.

Upon discovering that scheme, Cargill notified law enforcement. Cargill also sent a “notification of a claim” letter to National Union Fire Insurance Company of Pittsburgh, Pennsylvania, in April 2016, as required by its policy, alerting National Union that law enforcement was investigating a “potential fraud/embezzlement” by one of Cargill’s employees. Law enforcement monitored Backis for several months and arrested her in June 2016. Cargill fired Backis immediately thereafter. By then, Backis had diverted about $3 million from Cargill into her personal bank accounts. Backis later pleaded guilty, admitting in her plea agreement that she had embezzled over $3 million from Cargill and that the intended amount of loss was at least $25 million.

National Union and Cargill hired BDO Advisory to conduct the investigation into Cargill’s claim for the loss caused by Backis’s scheme. BDO investigated Cargill’s claim for two and a half years. BDO issued its final report on May 28, 2019.

The report concluded that had it not been for Backis’s misrepresentations, Cargill would have sent “minimal” grain to Albany. This conclusion was supported by the fact that after Backis was fired, new sales of grain in Albany declined by approximately 90%, and Cargill exited the Albany grain market altogether in 2018.

After BDO Advisory submitted its finalized report to the parties, National Union notified Cargill of its position that the policy covered only the $3 million that Backis embezzled and not the remaining $29 million of the total loss tabulated by the report. National Union then filed suit to obtain a declaration in its favor, and Cargill counterclaimed for breach of contract. National Union filed an answer to the counterclaim, in which it reserved the “right to assert any and all” affirmative defenses. Cargill moved for judgment on the pleadings, which the district court granted after concluding that the entire $32 million calculated by the report was covered by the policy. National Union appealed, arguing that there were factual disputes precluding judgment on the pleadings and that Backis’s conduct did not fall within the policy’s employee theft clause. It also contended that the April 2016 claim notification letter sent by Cargill did not constitute a formal request for payment sufficient to trigger prejudgment interest.

The district court did not err by concluding there were no disputes as to any material facts that precluded granting Cargill’s Rule 12(c) motion. The supreme court affirmed the district court’s judgment.

National Union Fire Insurance Company v. Cargill, Inc.—U.S. District Court for the District of Minnesota—March 7, 2023—No. 21-3141.